UPDATE 2-Wall St sues CFTC over commodity trading crackdown

* Wall Street slaps CFTC with suit over trading crackdown

* Groups says position limit plan lacked reason

* First ever suit faced by CFTC

(Updates with more context)

By Christopher Doering

WASHINGTON, Dec 2 Two major financial
trade groups sued the U.S. futures regulator on Friday over new
rules to crack down on commodity speculation, launching a second
legal assault against the biggest U.S. financial overhaul in
decades.

The suit, which had been widely expected given years of
fierce debate over the need for so-called "position limits", the
groups said the Commodity Futures Trading Commission's rule to
prevent excessive speculation in markets like oil and gold was
procedurally flawed and "lacked a reasoned basis."

The Securities Industry and Financial Markets Association
and the International Swaps and Derivatives Association also
argued that the agency had not conducted sufficient cost-benefit
analysis of the tough new limits, which they say would will hurt
the markets by reducing liquidity and increasing volatility.

"The evidence is overwhelming that position limits are, at
best, unnecessary and may, at worst, negatively impact commodity
markets and users,” ISDA Chief Executive Conrad Voldstad said in
a statement.

"It has the potential to harm markets at a time when they
can least afford it," Voldstad and SIFMA President and Chief
Executive Officer T. Timothy Ryan, Jr., said.

The suit, the first ever against a CFTC rule, was filed in
federal court in the District of Columbia.

The broadside from Wall Street comes amid intensifying
efforts by the financial sector and Republicans to push back
regulators' efforts to implement last year's sweeping Dodd-Frank
reforms, including starving the CFTC of funds.

Ever since it was first mooted following the commodity spike
in 2008, the notion of position limits that would cap the number
of futures and swaps contracts that any single trader can hold
has been decried by most on Wall Street and in the industry as a
misguided political attempt to cap soaring prices.

The CFTC narrowly approved in October its position limits
rule by a 3-2 vote, but there was already significant internal
dissent within the agency on whether the rule was even needed.

“The CFTC has been preparing for this since shortly after
the passage of Dodd-Frank and long before any rules were
promulgated," said said Michael Greenberger, a law professor at
the University of Maryland and the CFTC's former director of
trading and markets.

"They have brought in very able counsel and simply
bringing a suit does not mean the rules are yet in any way in
jeopardy. Challenges to rules brought under Dodd-Frank are going
to be par for the course."

EARLY DISSENT ON RULE

Republican commissioners Jill Sommers and Scott O'Malia
opposed the measure. O'Malia said the agency had overreached its
mandate and echoed the industry's argument that there was no
"empirical evidence" to substantiate the rule.

Other regulators are already facing the legal backlash.

After an eight-month battle, the Securities and Exchange
Commission in July had its first reversal of a Dodd-Frank rule
when a federal appeals court found the SEC had conducted a
flawed economic analysis to support a rule that would make it
easier for shareholders to nominate directors to corporate
boards.

The CFTC's final version of its position limits measure was
viewed as offering some relief for the industry, relenting on
several contentious provisions from an earlier draft.

But it would still have sweeping impact on big banks like
Morgan Stanley (MS.N) and traders including grains giant
Cargill, forcing them to scale back businesses, and likely
staunching the flow of financial capital into commodities.

The CFTC has estimated the measure would cost the industry
$100 million in the first year.

All the position limit rules will be phased in over time,
with the final limits for all contract months set only after the
agency has collected a year's worth of swaps data.

That process will likely be finished late into 2012, CFTC
has said.

(Reporting by Christopher Doering; additional reporting by
David Sheppard in New York; Editing by Russell Blinch and Alden
Bentley)

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